Compensation scheme of last resort may be last straw for financial advice industry
• Financial advice industry opposes design of proposed compensation scheme of last resort (CSLR).
• Concerns compensation scheme will become a go-to option rather than last resort.
• Proposed scheme unfairly exempts some industry participants, such as product providers.
• Eight of Australia’s largest financial advice industry associations have united to oppose the design of the compensation scheme of last resort, contained in draft legislation released for public consultation.
Chartered Accountants Australia and New Zealand (Chartered Accountants ANZ), CPA Australia, Financial Planning Association of Australia (FPA), Institute of Public Accountants (IPA), SMSF Association (SMSFA), Association of Financial Advisers (AFA), Stockbrokers and Financial Advisers Association (SAFAA) and the Boutique Financial Planning Principals Association Inc. say the proposed scheme will make financial advice less affordable and accessible.
The Financial Services Royal Commission recommended the establishment of a compensation scheme of last resort to compensate consumers once all other avenues had been exhausted.
All eight associations support a truly last resort compensation scheme. However, the associations do not support the way the scheme is structured to include Australian Financial Complaints Authority’s (AFCA) outstanding expenses in addition to failing to address the causes of unpaid consumer compensation. The associations are concerned the scheme may not be used purely as a last resort. This is a major and unwarranted departure from the Royal Commission’s intent.
The Federal Government made a commitment to reducing red tape to cut the cost of doing business. The proposed scheme will add significant cost and complexity, which is at odds with this commitment.
The draft legislation establishes a CSLR operator as a subsidiary of AFCA. This adds unnecessary red tape by requiring ASIC to administer invoices and payments and significantly increases the Governments administration costs of the financial advice sector with little benefit to consumers.
ASIC fees for financial advisers have increased by more than 230 per cent over the past three years. Most financial advisers are sole traders or small businesses who cannot afford the rising costs associated with increased regulation. Others are authorised representatives of groups who participate in other compensation schemes, which adds duplication.
COVID impacts and Australia’s ageing population mean the nation’s advice needs are growing, yet escalating regulatory costs have already caused a mass exodus of advisers from the industry. The total number of financial advisers has fallen below 20,000 and will not be enough to meet this increasing demand. We anticipate the proposed scheme will further reduce adviser numbers.
Responsibility for consumer losses and complaints should be shared evenly across the sector. However, the proposed scheme does not apply to some industry participants, such as product manufacturers.
This means that manufacturers whose products are poorly designed and improperly fail won’t have to contribute to the compensation scheme.
The associations will be making individual submissions to the public consultation opposing the draft legislation on the grounds outlined here.
They are calling for the government to amend the draft legislation to ensure the proposed scheme can only be used as a last resort, is appropriately calculated and applies to all financial service industry participants.